Provisions Regarding Appointment And Disqualification Of Arbitrator Are Mandatory, Will Apply To Retired Judges As Well: Madras High Court

Justice Krishnan Ramasamy thus set aside an arbitral award that was passed by a sole arbitrator unilaterally appointed by one of the parties to the dispute.

If a retired Judge acted as an Advisor or giving opinion in the matter, will certainly comes under the category of disqualified persons category and the Act has not provided any special privileges for a retired Judge. That being the law enacted, the contention of the learned Senior counsel that the learned Arbitrator who is a retired Judge is free from bias, is not acceptable. A person who is disqualified from being appointed as an Arbitrator, cannot commence the arbitral proceedings and if he commences any such proceedings where even though both parties have participated and ultimately any award is passed, such award is non est in law and liable to be set aside...This Court is of the considered view that the learned Arbitrator who passed the Award, has become de jure to perform his functions by reason of the statutory bar under Section 12(5) r/w Schedule VII of the Act since appointed by the respondent/Lessor, who is ineligible to nominate the learned Arbitrator.

The court was dealing with a plea filed by The Chennai Silks challenging an arbitral award passed by Justice A Ramamoorthy (Retd) in its dispute with Sugam Vanijya Holdings Private Limited on the ground that the appointment of arbitrator was arbitrary.

Chennai Silks had entered into an agreement with Sugam Vanijya to lease out an area in the new VR Mall being constructed by Sugam. However, Chennai Silks terminated the contract due to unforeseen and unavoidable circumstances. When they claimed for a refund of interest free refundable security deposit of Rs.75,75,480/-, the respondents claimed a sum of Rs.11,88,16,397/- towards the rent for the lock-in period and other expenses. This led to a dispute between the parties and the invocation of the arbitration clause. Sugam unilaterally appointed a Sole arbitrator and after hearing the Sole arbitrator passed the impugned order.

The petitioners contended that the appointment of an arbitrator was arbitrary and unlawful. It was submitted the award was liable to be set aside as it was against the public policy of India and violated the basic notions of justice.

The respondents however submitted that the petitioners could not challenge the appointment of arbitrator at this stage after participating in the arbitration proceedings. It was submitted that once the petitioners participated in the proceeding and filed their pleadings, it would amount to express agreement. It was also submitted that the Sole arbitrator was a retired judge and was thus a neutral party without any bias.

The court however disagreed with this view. The court noted that the Statute specifically talked about “express agreement in writing” from parties who are willing to waive their right to object the unilateral appointment. According to the court, the object was to know if the party had confidence on the arbitrator. In the present case, no such express agreement was given in writing. Thus, the court held that the petitioners had not waived off their right to object the appointment.

In other words, when arbitral proceedings are commenced by a disqualified person, the question of mere participation in the arbitral proceedings by the parties cannot be considered as a waiver. As far as the unilateral appointment of the Arbitrator is concerned, to waive the disqualification attached, is only by way of express agreement in writing by the other party in terms of Section 12(5), which should be obtained in 30 days, otherwise, it would be considered that there is no agreement between the parties for the appointment of Arbitrator unilaterally.

With respect to the appointment of arbitrator, the court held that as per the Act, interested persons to a dispute would not only be ineligible to act as an arbitrator, but also be proscribed from appointing an arbitrator to adjudicate the dispute. The court noted that since the arbitrator was appointed unilaterally, a reasonable and justifiable doubt will arise in the minds of the petitioner regarding bias. The court added that the very purpose of the Section was to ensure the independence and impartiality of arbitrators and if any ineligible arbitrator was appointed, it would strike at the very jurisdiction of the arbitrator.

In the present case, the court found that the Sole arbitrator appointed unilaterally by the respondents was ineligible and thus the arbitral award passed by him would be non est in law.

Conducting the arbitral proceedings and passing an award by a disqualified person is as good as conducting the proceedings and delivering the judgment by a Kangaroo Court where even both the parties had participated. Law will not recognize any judgment or order passed by Kangaroo Court where the law and justice are disregarded or perverted and the similar logic would apply to a disqualified person who is appointed as an Arbitrator.

The court thus set aside the arbitral award and further appointed Justice N Kirubakaran (Retd) as the arbitrator to resolve the dispute between the parties. The court also directed the arbitrator to hear the matter and pass an award within a period of six months.

Case Title: M/s. Prime Store and others v. Sugam Vanijya Holdings Private Limited and others

Citation: 2023 LiveLaw (Mad) 135